Recently introduced EU deficiency payments will not affect several important production factors in the Dutch dairy sector, says Dutch researcher Daan Ooms. However, although direct deficiency payments do not directly affect production, the changed policy will lead to a strong decrease in the number of dairy farms in the Netherlands.
Daan Ooms developed econometric models to study the expected effects of policy changes on dairy farms. These models took into account differences between farms that are not directly observable in their production figures, for example, the difference in management capacity between dairy farm owners.
Loss of small farms
The changed policy will have a negative effect on the income of dairy farmers. This effect is relatively strong for small farms. The falling income increases the chance that farms stop milk production. This will probably lead to the disappearance of many small farms. The remaining farms will then be able to grow further and benefit from the increased capacity to earn.
Deficiency payments
In 2006, the European Union introduced direct deficiency payments. The World Trade Organisation (WTO) called for indirect (not dependent on production size) deficiency payments for family farms. According to WTO this approach has the least impact on production and trade. Yet economists argue that indirect deficiency payments do affect production, for example, due to income effects on labour input and investments. Yet the farm-specific models developed by Ooms reveal no consequences for the production. There is, however, an effect on the number of farms.
European policy
The Dutch dairy sector is to a large extent regulated by the Common Agricultural Policy (CAP) of the European Union. Since 1984 this has regulated milk production via a farm-specific quota. The CAP has become even more farm-specific with the introduction of direct deficiency payments in 2006. Ooms has developed models in order to understand how individual family farms respond to changes in the CAP. Daan Ooms’ research was funded by NWO.